What Factors Influence Your Credit Score

2015-11-06   minute read

Grant Bazian

Here are six key factors that can impact on your credit score and in turn, your chances of being given credit:

Person at a coffee shop holding their cellphone and a credit card

1. Total Number of Accounts

Consumers with a higher number of credit accounts will often have better credit scores as it shows they have been approved by more lenders. That being said, it’s not necessarily recommended to open several lines of credit simply to increase your number of accounts as multiple payments at varying interest rates could become unmanageable over a period of time, steering you into financial distress. If you are looking to apply for new credit, make sure to do a full assessment of your finances and an in-depth look into the interest rates and payment schedule of the credit account to be sure the debt is something you can manage.

2.  Average Age of Open Credit Lines

If your credit history is lengthy, creditors have more information at their disposal to accurately assess your ability to successfully manage your debt. For this reason, closing your oldest credit card account is usually not advised. Closing credit accounts could reduce the length of your open credit lines and reduce opportunity for further credit.

3. Derogatory Marks

Derogatory marks could include accounts in collections, bankruptcies, foreclosures and any liens you may have. Your credit score will be negatively affected by a derogatory mark on your credit report. Typically, a derogatory mark will be included in your credit report for a period of seven to ten years.

4. Total Hard Credit Inquiries

Hard inquiries occur when a financial institution checks your credit in order to decide whether to approve you for a loan or credit card. A hard inquiry may occur when you apply for a student, auto, business, auto or personal loan, a credit card or a mortgage. In some circumstances, a landlord will also be able to make an inquiry to inform them on potential tenants. One hard inquiry could negatively affect your credit score by a few points, but the effect will not typically last long. That being said, multiple hard inquiries could communicate to lenders that you are desperate for credit and potentially unable to make your debt payments.

5. Open Credit Card Utilization

Your open credit card utilization rate is calculated by taking your total open credit card balances and dividing that number by your total open credit card limits. The resulting percentage is your utilization rate. Credit card utilization rate is not calculated by looking at the balance you carry over from one month to the next. It is calculated using the balance you have at the time that your credit card issuer contacts the credit bureau. For this reason, it’s not necessary to carry a balance from month to month. Maintaining a healthy credit card utilization can be done by regularly using your credit card and then paying off your balance every month.

6. Percent of On-Time Payments

Your percentage of on-time payments will significantly affect your credit score. Paying your bills on time is one of the best ways to maintain credit health as it shows creditors that you're reliable and will pay back your debts.

It's important to note that no single factor works independently of the others. Each one can contribute to your overall credit score. While having a good credit score is important for achieving some of your life’s objectives, debt can also be deceiving. It can be all too easy to fall into a cycle of debt that can make you feel out of control. If your credit score has been negatively impacted by unmanageable debt, contact your local Trustee for a free, no-obligation consultation as to what debt solutions might be available to you.

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